australian financial review article (11/04/14)

Vodafone customers return as earnings beat estimates

DAVID RAMLI


Many Australian consumers have been praying that a price war among telecommunications companies is set to deliver low-cost services and Apple iPhones.

But a new report from Goldman Sachs has poured cold water on those heated dreams with Vodafone Hutchison Australia’s rising earnings decreasing the need to buy customers.

Telstra’s continuing domination of the mobile market had raised hopes among consumer advocates that SingTel-Optus and Vodafone Hutchison Australia would start slashing prices and their own profits to win back subscribers.

However, Goldman Sachs research analyst Raymond Tong said Vodafone Australia’s filings with the Australian Securities and Investments Commission showed earnings at the company on the rise.

“[Vodafone Australia’s] accounts show financial year 2013 earnings before interest, taxation, depreciation and amortisation of $859 million versus Goldman Sachs’ estimate of $750 million,” he told clients.

The boost in earnings came thanks in large part to the spending cuts at the company, which were driven by its recently departed chief executive Bill Morrow, who is now making similar changes at NBN Co.

Vodafone Australia will hit positive free cash flow by financial year 2015 thanks to these cuts, a reduction in spending on capital expenditure and a growing subscriber base from this year onwards.

The company recorded its first month of positive subscriber growth in two years last December and is widely expected to gain a small number of customers during 2014. It lost over 1.2 million customers over 2013 at a time when Telstra substantially grew its subscriber base.

“A growing Vodafone Australia is important for overall mobile industry health as it removes the risk of an aggressive price discounting strategy,” he said. “While Vodafone has become more competitive (eg double data [promotions]), the focus on profitability is clear from recent effective price rises as it cut handset subsidies to two-year lows.”

This is good news for Telstra’s shareholders who can expect the company’s strong profit growth to continue because it won’t need to match the prices of rivals, as it was forced to in 2011 - a move that hurt the earnings of all three major telcos.

But it’s little comfort for Australia’s mobile subscribers who will see the cost of their favourite smartphones and download data plans stay relatively high.